Why institutional investors should consider investing in Private Debt

In early 2018, alternative investment advisor, Tower Watson, published a study whose title sums up quite objectively the main reason why institutional investors should consider increasing their exposure to private debt. The title of the study is: “Looking for variable income returns with risk similar to fixed income.” In summary, private debt investments have the potential to improve the risk-adjusted return profile of a diversified portfolio, especially for investors who are prone to accept the low liquidity factor and implement a buy-and-hold strategy. The following figure summarizes and compares the main characteristics of investments in private debt assets:

CHART 2: PRIVATE DEBT VERSUS HIGH-YIELD BONDS VERSUS SENIOR LOANS

In a recent study by North American fund manager Nuveen, the authors compiled risk and return data from two major segments of the private equity, small and medium-sized lending, and mezzanine lending portfolio, and compared this data with other investment segments in fixed income, as well as the correlations of the different types of credit investments. The results are summarized in the tables below:

In Brazil, risk and return data on private debt funds are still very limited. However, analyzing the performance of one of Captalys Orion’s main funds in Brazil, we can verify that: a) quality of the management team, b) long-term vision, c) appetite for less liquid assets, and d) capacity to originate attractive investment opportunities are effective in delivering returns that more than outweigh the risks involved.

Since its inception in September 2011, the fund has delivered a yield of 185.25% or 185% of the CDI variation in the period;

In 2017, the quotas of the fund were valued at 17.02% or 171% of CDI;

In 2018, until October, Captalys Orion’s accumulated profitability was 10.91% or 203% of the CDI variation in the period.